Hindustan Unilever's Board approved on 15th December a trademark license agreement with its parent the Unilever which provides for payment of trademark royalty at the rate of 1% of net sales on specific brands, where Unilever owns the trademark and HUL is the license user. This is effective from 1st January, 2010, verily a new year gift to Unilever. HUL Board goes on to record that this is within the Government of India guidelines for payment of royalty. This assertion is superfluous since the company has no right to violate GOI guidelines anyway.
The company's Board is perhaps within its rights in approving this arrangement. But there is no clarity on what will be its impact on HUL's financials. Only one thing is clear. Return on sales will drop by 1%
This agreement is a related-party transaction and therefore merits full disclosure on its details and implications. HUL's Board has a fiduciary duty to protect HUL's interest. Lack of transparency casts doubt on the Board's discharge of this duty. Even if law does not require reference to shareholders on a crucial item like this, one expects "well-governed" companies like HUL to take the permission of its shareholders for paying royalty to its parent company.